The importance of Power of Compound interest and Early Investing

POSTED BY manish ON January 22, 2008 COMMENTS (88)

This post talks about the importance of Investing early in life and do not get late at all. Also it shows the power of compound interest and regular investing.

When we invest early in our lives, the amount keeps growing and when it becomes a big chunk, the growth in amount every year is a lot more, compared to initial years .

Power of compound interest

For Example:

Suppose you start in 2008 and want to save for retirement and If regularly invest 1 lacs every year at 15% return per Annam , the investment will be Rs 4.35 Crores in 2038 , but if you do late for 2 years and start in 2010 , it will be Rs 3.27 Crores only by 2038 , that will leave you with Rs 1.08 Crore less money.

Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lacs. This 58 Lacks is nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you don’t get benefit of compounding.

Lets see two Case studies and there results of early investing:

CASE STUDY 1

Robert and Ajay start career same time at age 23

Case 1 (Ajay) :

– Understand the importance of investing Early, enjoys some time and then …

– Start investing early (at 25) and invests Rs 50,000 every year.

– Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year. (This is annuity , don’t confuse with Compound interest 🙂 )

– Stops after that and doesn’t invest extra money till he is 65 , he just leaves that 7.97 lacks in investment and that keeps growing.

– when he is 65 , he has Rs 1 Crore 40 Lacs 🙂

Case 2 (Robert):

– Spends a lot and doesn’t believe in investing early, and when he is 35 he starts investing for next 30 years he regularly invests 50,000 till he is 65.

– Assuming the same return of 10% per year.

– He has only 82.2 lacs 🙁

Even after saving for extra 20 years Robert has 43% less than Ajay .
Total amount after n years with A amount every year at i .

return=A *[(1+i)^n-1]/i

Ref : https://en.wikipedia.org/wiki/Annuity_(finance_theory)

Watch this video to learn the power of compounding:

CASE STUDY 2

After 100 years : Robert from Robertsganj and Ajay from Haryana (rebirth) , This time Robert is extra smart and Ajay is a Software Engineer.

Both are 25 and want to retire at 60 , both earn good money … (both can invest 1 lac per/year) … assuming return at 12% per/Annam …

Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money grows to good amount and he just keep that money invested till he retires …, he can invest for another 20 years also but now he spends all this 1 lac for travelling and enjoying his life every year …

Case 2 : Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts after 5 years , he thinks lets enjoy some years .

Case 2.1 : After 5 yrs he starts investing 1 lac every year for next 5 year … He sees that Robert has stopped investing now and enjoying now, so he also does same , stops investing and leaves his money invested which is growing …

Case 2.2 : After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement, he wants to have more money than Robert at the end.

Results at 12% return

Case 2.1 : Ajay get how much ??
– 66 lacs

Case 2.2 Ajay gets ??
– 1.64 crore

And what about Robert? investing 10 yrs and stopping after that and enjoying for next 20 years

– 1.72 crores !!

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

 

88 replies on this article “The importance of Power of Compound interest and Early Investing”

  1. SanjayLaha says:

    Fantastic articles and ideas. I am spending a lot by reading these topics. Thanks a lot Manish.

  2. Srinivas says:

    Hi manish,

    Nice article.

    What is the best time to buy a house by taking loan? I’m salaried(1.5 lacs per month) and no major savings are there with me for now. Please suggest me?

    Thanks
    -Srinivas

    1. What you mean by what is the best time ? Are you asking the best time in one’s life or in the year ?

      1. Srinivas says:

        Best time in one’s life?

        1. I mean the stage .. like before 30yrs .. 30-40 yrs .. etc

          1. Srinivas says:

            Sorry Manish for the incomplete info.

            At any age(my age is 27 now) but I heard that it is good to have some 30-40% amount of the cost in our hand before taking loan.

      2. nandu says:

        Manish.. i need your suggation for my lic policies..

  3. Avinash says:

    Hi,

    I’m looking for an investment plan wherein I get interest getting compounded, either annually or quarterly.
    So, can anyone please suggest some good options regarding this?

    Thanks,
    Avinash Kumar

    1. Hi Avinash

      What about mutual funds ?

  4. Amar says:

    Hi Manish,

    I have currently a saving of 6 lakhs and I want to invest it for next 10-12 years so that I can get a good monthly income after 10-12 years.

    could you please give me some advice and example.

    Regards
    Amar

    1. you can invest it in mutual funds

  5. Kartik Haria says:

    Dear Manish,
    I am 22yrs old. I would want to know how should I distribute my investment.
    Also what all compund interest investment options do I have??
    I am new to the finance and investing aspects and still learning. Please guide.

    1. Hi Kartik

      You can invest in mutual funds to start with . We can help you build a portfolio ! , let us know if you are interested

      Manish

      1. Srinivas says:

        I am 23 yrs old now and earning 35k per month as of now. I can save at least 2000 per month for the next 15 years ONLY towards my RETIREMENT benefits. How to and where to invest? Please help me build a good portfolio. Thanks a lot!

        1. Hi Srinivas

          The best option is Mutual funds ! … As you are young you can build good wealth in mutual funds. My team can help you setup everything smoothly.. Please fill up this form and my team will get in touch with you

          https://www.jagoinvestor.com/solutions/invest-in-mutual-funds#sign-up

          Manish

    2. SANJAY says:

      I think he should start sip in mutual funds. For next 2-3 yrs he can watch his status of investment and also study direct stock market. After gahtering some knowledge he can invest in stocks also for long term.

  6. BHAVIN says:

    DEAR MANISH,
    I WOULD LIKE TO INVEST 50000 INR EVERY YEAR FOR 10 YEAR SO HOW MUCH I GET AFTER 20 YEAR AND WHICH ONE IS BEST POLICY OR MUTUAL FUND TO RETURN BACK MAXIMUM AFTER 20 YEAR.

    1. Hi BHAVIN

      You can invest in mutual funds . We can help you in that

  7. Sunil Kumar says:

    Dear Manish,

    I am 25 now, I would like to invest in any plans which are compound. Could you please tell me which one is the good for me.

    I can save every month 5 K. I would like to get some 80 Lakhs by end of my 50 Years.

    Thanks.

    1. You can invest in mutual funds. if you need our help , you can contact us at https://www.jagoinvestor.com/services

  8. Laltu says:

    Hi, I am 30 yrs old , married & have a 7 month old Boy. My annual income 12 Lac. In which house expense Rs20000 + Fuel & driver cost for my car is monthly Rs 15ooo. Mscleneous Rs5000/-
    So the monthly savings with me is Rs 60000/-.

    At present I have one PPF account running for last 3 years. One PPF for my wife (House wife) opened this year.
    Yearly savings to LIC Total 50000/-

    Please advice me for some good savings option which will give me option for preodical return so that I can plan some big expenses like forign travel & so on. Also I should have good money for my retired life .

    1. You should look at options like Mutual funds SIP and many be some FD’s .. dont go for complicated options !

  9. Samir says:

    Hi Manish,

    This is a very nice article.

    I am looking for a regular monthly investment of 5K for a very long term , 15 -20 years. What form of investment should I use for the same to get the benefits of compounding?

    Also want to know if the HDFC Sanchay (infra bonds) is a good insurance plan or should I go for some other insurance plan ?

    I am 33 now. I have a 4 yr old kid. Following is the investment I have done so far:

    1. HDFC Young Star Super ( yearly 1.5 lac premium). 4 premiums paid. Mandatory 1 premium left. Should I keep investd after 5 yrs.
    2. PPF contribution 50K/year.
    3. FD worth 4 lacs

    In general what corrections should I do for ym investments.

    Thanks,
    Samir

    1. I would say that over a long term you can invest 50% in PPF and 50% in equity mutual funds.

      1. Samir says:

        Thanks MAnish.

        What is take on the following 3 funds for SIP fot 8-10 yrs.

        1. Birla SL Long Term Advan. (G) — Rs 2K/month
        2. ICICI Prudential Dynamic Plan (G) — Rs 2K/month
        3. Birla Sun Life Top 100 Fund (G) — Rs 2K/month

        Regards,
        Samiran

  10. Dhara says:

    Hi Manish,
    Heartly thanks for your post.
    One simple question that if i m regularly investing in RDeposit in bank.. How i will get tax benefit.. ??

    regds,
    Dhara

    1. You wont .. There is no income tax benefit in RD !

  11. Jogy George says:

    Case Study-1:
    Case 1 (Ajay) : Estimated 1Ccrore 40 Lakhs, Actual value is 13 Crore 11 Lakhs
    Why: 7.97 Lakhs invested for 30 years (35 age to 65 age) at the rate of 10% yields:
    =7.97L *(1.1^30 – 1)/0.1 =7.97L *164.49 times =1311 Lakhs = 13 Crore 11 Lakhs

    JOGY
    Indore
    ——-Please correct the other statements too———————

    1. SanjayLaha says:

      Some mistake has happened in the formula. The denominator ‘i’, i.e., 0.1 can not be there

  12. atanu says:

    Hi Manish,
    I am 39 now.
    I wish to get 40 lacs at the age of 64. How I plan my investment to achieve my goal. I have already two mutual fund as SIP. And these are 1 year old.
    (1)Hdfc Top 200(rs 1000/month) and
    (2) Reliance Gold (rs 500/month).
    Thank you and regards.
    Atanu

    1. This calculator tells me that you will be able to make close to 24 lacs at 12% return https://www.jagoinvestor.com/calculators/html/Increasing-SIP-Calculator.html

      1. atanu says:

        Thanks Manish.

  13. Chetan Ambi says:

    Thanks for showing the power of compounding and early investing!! This article really wake up people who are new to investing world !! Great work. Keep going Manish..

  14. Dhanasekar says:

    Dear Manish,

    Good day

    I am working as a Merchant Navy officer, Earning some good money. Yearly package of 10 to 12 lac Average

    Thinking of saving for future( Child Education and My retirement).

    Now i am 27, My child is just 3 Month baby.

    Yearly i can save about 5 lac apart from all my expends and financial obligations.

    I am already having term insurance for my own (since the risk profile is high in my profession) coverage till 57 years. (completed only 3 premiums)

    Please advice me to Achieve my Goal with Descent Way,

    1. Which investment could be suit for my Retirement and how much should i invest yearly for getting 50,000 per month after 20 years.

    2. Which investment to choose for my child higher education say after 15 years ( Please Note: i don’t want to take risk in this saving particularly). I am looking for a plan which gives reasonable growth with low risk for the above mentioned Maturity period.

    Also pl advice me the following for my knowledge:

    1. if i invest 5 lac only once (In any Investment) and what could be the expected Net Amount after 10 years. ( pl give some example with plans)

    1. 1. You should start SIP in equity mutual funds for your retirement
      2. You can choose PPF + Index fund for your children education goal

      if you invest 5 lacs today, then after 10 yrs, you can expect close to 10-12 lacs .

      1. Dhanasekar says:

        Thank you so much for your kind advice and keep rocking…

        1. Thanks for your comment

  15. Priyank says:

    Hi Manish,
    Another informative article, thanks a lot!!
    I also read your other articles and took an online term insurance from Aviva for 1 crore. But I was late to come across jagoinvestor and landed up taking an endowment plan from LIC 2 years back. I am not sure what to do with this endowment plan as yearly premium is 67,288.

    I am 30 years old and want to retire in next 20 years. I want to create a retirement corpse of 2 crores. Below is my current portfolio:
    1. EPF of 7500/month.
    2. ICICI Investshield Cashbak – 2000/month for 15 years, 4.5 years completed.
    3. Endowment policy from LIC – 67288/year for 15 years, 2 premiums paid.

    Please have a look and suggest how to achieve my goal.

    Thanks,
    Priyank Bhatt

    1. Hi Priyank

      I suggest open a thread on our forum to discuss this – https://www.jagoinvestor.com/forum/

  16. Nitin says:

    12% interest kese milega kahaan invest kare?
    i am employed with a company earning 35k per month aged 28 wants to start investing.
    but where to invest which can provide me higher returns?

    1. Any equity product has the potential to give you those kind of returns in long period of time

      1. Anjan says:

        But equity products also have the potential to ruin you if luck is not on your side. Your entire financial life could be in mess 10 or 20 years down the line if returns are not up to the mark and at that point you will have reached the point of no return. So many people have lost money investing in equity that even today I can’t muster up enough courage to start investing in MF.

        Sometimes I feel its better to not be greedy and be content with debt returns. You might not become a crorepati in your lifetime but atleast most of your dreams will be fulfilled and you will never go hungry 🙂 What do you think?

        1. Yes Anjan

          You might not get the expected returns, but then the point I am trying to raise is about the probability of returns .. in a 10-20 yrs period , the chances you get a excellent return outweighs the bad return !

          How many people you have seen who have been with equity for a 10-20 yrs and they are repenting ?

          I suggest you get out of this conversation of yours about “I will loose money if I invest in equity” .. I assume your mindset has built up over the years because of all the stories you have heard till date ..

          I am not saying that what you are saying is entirely wrong, you can surely be with DEBT products, just that then you are CHOOSING to put more pressure on you and be out of potential bull run .. Equity investments should be done if you can take the pressure of VOLATILITY in the worth of your portfolio .. if you just want to see a UPTREND all the time, then yes, you are better in debt portfolio ..

          I hope I was able to communicate something valuable to you 🙂

          Manish

  17. jagdish says:

    hi , i want save 500 per month , after 15 years how much i get returns . is there insurance coverage added.

    1. Which policy are you talking about

  18. Kamal says:

    Hi Manish,

    Wonderful Article. Clearly the iterates the necessity of starting the savings earlier. An eye opener article. Thanks a lot !!!

  19. vibek says:

    I want my money to spread across a range of diiferent investment type,
    on the other hand i cant afford to take any kind of risk, goal will be to grow my money and get a regular income..

    1. If you do not want to take risk , your options are just PPF , FD and insurance policies .

      1. vibek says:

        Thnaks manish.. sorry for the late repli …

  20. vibek says:

    Manish,
    I am 24 yrs ,and have completed almost 2 yrs of my job. I have an LIC (30,000/yr) and 2 RD ‘s (18 months and 6 months). I want to invest in some more, can you suggest me where i can invest my money.

    Thanks,
    vibek

    1. What is your risk appetite and goals ?

  21. Chaithanya Krishna says:

    Hello Sir,
    I am 21 years old.I will start my career in TCS by November 1 2012. I would be paid 17k during 3 months of training and 24k after the training.
    As I am young, can you mention some investment options to my age.

    1. I would suggest to start with a simple RD and then move upwards !

  22. munish says:

    dear manish,
    i am 34 yr want to invest 50,000- 75000 per annum in relatively safer investment wat should i choose ?

  23. Abhijit says:

    Hi Manish,

    As I have already posted that my PPF account is now active & I can start investing. However, as I am 29 now & feel that I lost few important years of my life by not knowing the powwer of early investing.

    I started earning decently in 25th year & from then I am not really doing anything about my personal finance. I am feeling really BAD about this thing.

    Just thinking how I can cover it up(my mistakes), really curious if I can do something to cover up & reach upto the mark.
    One way I understand is investing in PPF to the max limit 1 Lac every year so as you will give some power to the coumpounding year by year.

    But still you must be knowing something where I can really do something to correct my mistake in the past.

    Thanks
    Abhijit

    1. You should now concentrate hard in equity , try to see how you can maximize your savings for covering up the damage in last few years !

      1. Abhijit says:

        Hey Manish thanks for your advice however I have tried playing with equities when the market was bullish & 21k mark. Rs 1lac are now 25k unfortunately. 100 percent agreement with one of your comment that direct equity is not everybody’s cup of tea.

        But I am always positive with the way ahead to make it fruitful.

        Does it mean that I should go for equity mutual funds instead of direct Trading??

        1. I do not want to discourage you . But at some point of time , you need to decide if its just a low phase and you can recover or you are just over confident ! .. Just get out of it , if its not working out . Its a expensive hobby !

  24. Roshan R says:

    In CASE 1 ( AJAY ), you mention : ” he just leaves that 7.97 lacks in investment and that keeps growing.”

    What investment are you referring to ? Fixed Deposit or Savings account or something else ?

    Really loved this article. Just starting to earn now so this is like a textbook to me. Thanks.

    1. Its Equity mutual funds

  25. Wonderful.Let every one of us take advantage of compound interest.

  26. srivatsan says:

    Your post is very nice .,
    I understood about the compounding power ., But is their any place where i can get 15% interest constantly ., As if i invest in stocks i should know in and out to get such an interest and even mutual funds will not give that much in average. So i think its quite to get such an yield.,
    Please help

    1. Srivatsan

      You will not get 15% consistently anywhere ! . Not more than bank FD

      Manish

  27. Investor says:

    Nice Article Manish.

    But can you tell me where do i really put compound interest to work in India ? Say if i want to invest 50K a year with 10% interest for next 30 years.

    1. Investor

      You will not get a constant return like that for 30 yrs .. but over a loing term the returns would turn out to be good enough in Equity . So I would suggest going for periodic investments for 30 yrs in Balanced funds

      Manish

  28. Anjali Khare says:

    Hi! Manish,
    Thanks for such a great article.I’m 29 year old.Working as a gov.employe.
    Presantly I earn 2.40 lac.per annum.
    I’ve 1 jeevan anand policy 19500 per year
    I’ve 1 jeevan saral policy for 20 year period 49000/per year
    I’ve invested 35ooo/in cole n relaince gold
    I am from this year investing 5000/month in mutual fund through sip.
    I am planig to marry and also after 5 years to purchase a house.
    How should I plan my investment so I can make a downpaymant of 1500000/after five years from now?
    Plase reply.

    1. Anjali

      You are taking too many things at one time , Lets first get into insurance ,right now who is dependent on you ? If there is no one , then why have you taken insurance policies ? Better close them and take term plan incase you need any insurance .

      Only after you take your insurance decisions , you should move with other parts

      Manish

  29. James Andrews says:

    Great article Manish. Whilst teaching my kids about the importance of saving early in life I came across a website that your readers might be interested in. Its called Inspired to Save http://www.inspiredtosave.com . It has a really clever compound interest calculator on it that lets you personalise your results and see images of products that you will be able to afford when you are older.

    James

    1. James

      Thanks for the link , its an interesting way to show the calculations 🙂

      manish

  30. vijay doiphode says:

    hi manish,

    I read and liked the blog on power of compounding and early investment.

    I am 30yrs old. I have 1 moneyback , 1 jeevan anand and 2 of new bima kirans respectively of 1 lakh.

    Instead of these i don’t have any kind of investment or savings.

    I am working as a consultant (sound engineer).

    Presently, i earn around 2.4lakhs per annum.

    Please guide me on investment and how can i acheive according to your said blog.

    Thanks& Regards

    Vijay Doiphode

    1. Vijay

      Not sure what is your final goal in investment , all you have to do is divert your investments from start in equity for long term and not just debt like your Insurance policies .

      Manish

  31. Manish Singh says:

    Hi Manish,

    I am a new reader of your blogs and found it quite intresting. Just came to this link form the article for EPF and PPF. Well I fall under the category a little bit smarter than Ajay and a little fool than Robert for the case 2. Well jokes apart. What I needed to know –

    > I opened my PPF account in 2009 fiscal year and depositing 70000 every year (Current balance is 100000 INR). What is the amount I can expect after the complete term of 15 years (not extending for the next 5).
    > I have invested around 2 lakhs in Shares and a paltry 10000 in Mutual Funds(planning to put some more).
    > I have Moneyback Life Insuarance for around 5 lakhs and Health Insurance renewed yearly for the sum of 500000 INR.
    > I have ULIP’s worth 45000 via ICICI investing monthly 1250 for the same continued.
    > I have NSC worth around 20000 deposited last year. (Planning to continue depositing the same amount every year)
    > I am 30 Years now, married with a kid of 1 year. Monthly expenses come up to 20000 /month.
    > I keep around 50000 in my couple of saving accoutns just in case of emergency needs.
    > I don’t have any loans or any other financial commitments as of now.

    What else I need to modify (edit / remove / add) in my Financial Planning (apart from increasing the Mutual Funds – I plan to make it reach to 1 lakh at tleast in the next 2 years, and taking a term insurance of 500000 – I think that would suffice)?

    I have done whatever I think was a viable option and reliable one. I am not planning to put more than 3 lakhs in shares at any time looking at the vulenerablity of the market. My income stands at 500000 per annum.

    Your advice or any help is much appreciated.

    Regards,
    Manish Singh

    1. Manish

      your final value in PPF will depend on how much and how frequently you invest , calculate it your self , i have explained the formula’s on the blog .
      Review your moneyback and ULIP , you should shift to Term insurance .
      I can see you are doing debt investment (PPF , NSC) a lot , your asset allocation on equity side should be higher (assuming young age)
      – good that you dont have loans and have emergency funds

      action items

      – take term insurance
      – dont try too much in direct stocks if you are not passionate enough and have time
      – Reduce your debt part now , dont put more .

      Manish

  32. R Rajsekhar says:

    Hi manishji
    i have gone through ur article on ppf. i found it interesting. now, i am at 47 plus, i am a public sector servant & with a joint family of total 8 members & i am single earning person( myself;wife; 2 children(17yrs&13yrs);parents. my monthly take home salary is around rs.10000-15000/month. i will be retiring within the next 13 yrs. can i be eligible for opening the ppf a/c & give ur best option & suggestion.
    thanks

    rajsekhar

  33. Anonymous says:

    Hi Manish,
    you post some really good info's on your website. Can you try post something like Do's and Dont's while investing. Because sometimes people learning the articles get carried away too much without knowing the risks involved in it.

    Thanks,
    Dev

  34. Manish Chauhan says:

    @stock trading

    Very true

    Building long term wealth is function of your Efforts + Time

    If u have time in your hand , effort required will be minimum and anyone can do it with ease , but once time is gone , then you have to then reply mostly on the efforts which includes everything what you said ..

    Good point 🙂

    Manish

  35. stock trading says:

    You really never fail to amaze me Manish. This is a great post. I agree that the earlier people invest, the bigger the money they receive. However, there are also instances where some people really make it big even if they have started a little late in investing because of their in-dept understanding in their investment, smart fund allocations, aggressiveness, positive outlook and confidence.

    People should also understand that this is a rare case and an exception of the rule and not the rule itself.

    Happy investing everyone!

  36. Manish Chauhan says:

    Thanks Prashanth

    Keep visiting for great articles

    manish

    1. kumar says:

      Hello Manish, thank you very much for the details. I need some clarification on my investment.
      SBI: 50000 PA for 15 years (life insurance money back – unit linked) how much can i expect back in lumpsum.
      LIC: 1,20,000 PA for 20 years (traditional @ 10.2% PA guaranteed) how much can i expect back after tenure.

      Please I need some approximate figure in both the scenarios. My age is 35.

      regards,
      kumar

      1. It must be there in the policy documents anywyas .. that would give you exact answer !

        1. kumar says:

          the policy is confusing as was the sales man. any help from u is appreciated

          1. Vinay Pasalkar says:

            Hi Kumar,
            You should study product before buying not after buying.
            The general thumb rule is not to mix investment and insurance like once shouldn’t drink and drive because investing a lot of money in an instrument giving low returns will not beat inflation.

            Please keep Insurance & Investement separate. By investing in Endowment & Ulips, you will have very less cover.

            I’ll suggest you to take term plan & invest the remaining money in PPF or Mutual Fund.

            Thanks

  37. Pachi says:

    brilliant post!!!

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